Prospective buyers praise our three million dollars in adjusted EBITDA, but private equity groups are discounting our valuation because we spend eight hundred thousand dollars annually in recurring capital expenditures. How does CapEx intensity drag down our enterprise multiple, and how do we present maintenance versus growth CapEx to defend our net proceeds?

Question

Tyler Smith · Accepted Answer

EBITDA is a proxy for cash flow, but buyers pay for the cash they can actually extract from the business. When your company generates three million dollars in adjusted EBITDA but requires eight hundred thousand dollars in annual capital expenditures to maintain operations, your true operating cash flow is two point two million dollars. Private equity buyers use debt to fund acquisitions, and lenders will not finance phantom EBITDA consumed by heavy machinery, vehicle fleets, or mandatory technology infrastructure.

To stop buyers from discounting your multiple, you must dissect your CapEx into two distinct categories: maintenance CapEx and growth CapEx. Maintenance CapEx is the capital required to keep your existing revenue engine running at current output. Growth CapEx is discretionary capital spent to capture new market share, open facilities, or build new revenue-generating assets. If you lump them together on your general ledger, the buyer will assume the entire eight hundred thousand dollars is mandatory maintenance, slashing your free cash flow conversion rate from seventy-three percent to sixty percent and haircutting your multiple accordingly.

Take these actions to defend your valuation:
- Create an asset register that ties every historical capital purchase to specific return-on-investment outcomes. Show which expenditures directly expanded capacity rather than replaced worn-out assets.
- Isolate maintenance CapEx on your Scorecard and track it as a fixed percentage of revenue over a three-year period.
- Present an adjusted Free Cash Flow conversion schedule in your confidential information memorandum, explicitly adding back verified growth CapEx to arrive at normalized discretionary cash flow.

When you prove that a significant portion of your CapEx is completely optional growth investment that a new owner could pause without degrading baseline earnings, you preserve your institutional multiple.